Crown Holdings Downgraded to Sell - Analyst Blog

On Apr 8, 2013, Zacks Investment Research downgraded leading global manufacturer of packaging products for consumer goods, Crown Holdings Inc. CCK, to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold). The downgrade came on the back of negative revisions in the earnings estimates following a tepid fourth-quarter 2013 with both the top and bottom lines falling short of the respective Zacks Consensus Estimate.

Why the Downgrade  

Crown Holdings' earnings declined 6% year over year to 48 cents per share in the quarter, falling short of the Zacks Consensus Estimate of 50 cents. Net sales, however, rose 1.7% year over year to $2.07 billion on increased global beverage can volumes and the favorable impact of foreign currency translation, partially offset by decreased food can volumes. However, the number lagged the Zacks Consensus Estimate of $2.10 billion.

Crown Holdings expects that general business conditions in North America and Europe will improve in 2014. Beverage can growth and solid contributions from the 2013 capacity expansions in Cambodia, China, Malaysia, Thailand and Vietnam will also boost Crown Holdings' profitability. The company will also benefit from the start-up of a new plant in Teresina, Brazil.

However, there were some concerns that emerged during the fourth quarter which triggered a downward movement in estimates. The North America Food segment suffered a setback in the fourth quarter due to a bankrupt customer. The customer represents approximately $30 million in revenues and $5 to $6 million in profits. Thus, results of the segment will be affected in 2014 due to loss of the customer.

In the Asia Pacific division, pricing was negative during the quarter due to pricing pressure in China, given the excess capacity and strong competition from domestic can producers. Further, political tensions in emerging markets of Cambodia, Turkey and Thailand also act as headwinds.

Crown Holdings has substantial outstanding debt. The company exited 2013 with $3.8 billion of debt and a staggeringly high total debt to total capitalization of 91.6%. In addition, its pending acquisition of Mivisa would increase its indebtedness.

Furthermore, the food packaging business is somewhat seasonal, with the first quarter being historically the slowest. Results will thus be lower in the upcoming quarter.
 
Owing to concerns, analysts covering the stock downgraded their earnings estimates. Over the last 60 days, the Zacks Consensus Estimate for 2014 slipped 6% to $3.46 as all of the 8 estimates were revised downward. For 2015, the Zacks Consensus Estimate went down 5% to $3.66 as 3 of 7 estimates were pulled down over the same time frame.

Other Stocks to Consider

Some better-ranked stocks in the same sector include Packaging Corporation of America PKG, KapStone Paper and Packaging Corporation KS and Neenah Paper, Inc. NP, all of which carry a Zacks Rank #1 (Strong Buy).